Natural Gas (12-16-04)

Cleaner than other fossil fuels and abundant in the United States,
natural gas has gained an increasing foothold across the nation. It
powers over 60 million American homes and 90 percent of new power
plants. In all, natural gas accounts for nearly a quarter of energy
consumption in the US. The federal government has tracked the status
of natural gas as it has gained popularity and has periodically requested
reports on the subject. In 1992 it solicited the first update from
the National Petroleum Council (NPC),
entitled "Potential of Natural Gas in the United States."
Since that time NPC has issued two more reports, one in 1999 ("Meeting
the Challenges of the Nation's Growing Natural Gas Demand"),
and, most recently, in 2003 ("Balancing Natural Gas Policy--Fueling
the Demands of a Growing Economy"). Secretary of Energy Spencer
Abraham requested the latter in light of homeland security, price
volatility, fuel avaibility and other concerns.

Most Recent Action

A new report released on December 15th by the Consumer Federation
of America says a suite of policies addressing both demand and supply
are needed in coming years as consumers struggle with natural gas
bills that could average well over $1,000 per household this winter.
The report -- titled Responding to Turmoil in Natural Gas Markets:
The Consumer Case for Agressive Policies to Balance Supply and Demand
-- comes as key Senate lawmakers have placed development of natural
gas language on a fast track in preparation for another attempt to
pass comprehensive energy legislation.

Mark Cooper, the report's author, told Greenwire that the report
will form the basis for the group's response to a recent call by Senate
Energy and Natural Resources Committee Chairman Pete Domenici (R-NM)
for proposals for consideration when lawmakers craft the natural gas
provisions of energy legislation early next year. The report does
not endorse a specific policy but instead examines various options
based on their economic, environmental and security characteristics,
crafting a "framework" for weighing choices. Overall, the
report says a combination of efficiency, pipelined Alaskan gas, conventional
and unconventional sources, coal gasification and other steps will
be needed to prevent shortfalls as demand grows in coming decades.

On November 16th, the Federal Energy Regulatory Commission (FERC)
asked for public comments on the proposed
rule to establish an "open season" for companies to
bid on capacity in the Alaska Natural Gas Pipeline. According to Greenwire,
"An open season determines the size of the market demand for
gas on a given project, providing nondiscriminatory access to capacity
on any Alaska gas pipeline project while ensuring economic certainty
to support the construction of the pipeline and provide a stimulus
for further exploration, development and production of Alaskan gas."
Written comments must be submitted by December 17, 2004, and must
reference Docket No. RM05-1-000. Comments may be filed electronically
via the eFiling link on the commissions website at www.ferc.gov.
Paper comments, along with 14 copies, may be submitted to FERCs
Office of the Secretary, 888 First Street, NE, Washington, DC 20426.
(11/18/04)

On October 27th, the Federal Energy Regulatory Commission (FERC)
announced a rulemaking schedule establishing an "open season"
for energy companies to bid on capacity for the planned Alaska natural
gas pipeline. Companies including BP, Exxon Mobil, and ConocoPhillips
are expected to bid for a share of the pipeline that could transport
and estimated 4.5 billion cubic feet of natural gas per day by 2014.
The "open season" may run from a month to several months.
The agency will also be responsible for a single environmental review
to be completed within 18 months after receiving completed applications
from the projects developers. The FERC said it will issue a notice
of proposed rulemaking and a draft of the proposed regulations by
November 18, 2004. A one day technical conference will be held in
Alaska during the week of December 6 to solicit public comments on
the proposed regulations. Written comments must be received by December
17th. Visit the FERC website for
more information. (10/29/04)

The authorizing language for the Alaska natural gas pipeline was
attached to the FY05 Military Construction Appropriations bill just
prior to the vote and Congress' adjournment for the election on October
11th. According to Environment and Energy Daily, the language includes
"a ban on a northern route for the line that would bypass Alaska
markets, provisions that allow Alaska to control in-state use of the
gas to promote its use for heating or enhancement of a gas industry
in Alaska, and a streamlined permitting and expedited court review
process to speed construction and limit judicial or regulatory delays...The
bill also includes $20 million for a worker job training program in
Alaska, including $3 million for construction of a Fairbanks training
facility." This language, which effectively provides all the
necessary prerequisites for the $20 billion project to get underway,
was welcomed by the Alaska congressional delegation and may help Senator
Lisa Murkowski who is currently in the midst of a tough reelection
campaign. (10/20/04)

Previous Action

On September 30th, the 18 member Task
Force for Affordable Natural Gas issued its final report
on the causes of and short-term solutions to the natural gas shortage.
The report cited several policy shortcomings leading to tight gas
supplies including regulatory uncertainty, inability to identify potential
natural gas resources using 21st-century technology, difficulty obtaining
access to federal lands, and a lack of incentives to produce and transport
gas on those lands. The all-Republican task force also recommended
conducting a natural gas resource inventory on federal lands, creating
a federal office to coordinate permitting and environmental review
of natural gas projects, facilitating cooperation among federal and
state agencies and stakeholders on leasing and permitting for natural
gas production and transportation projects, streamlining the permitting
of natural gas projects on federal lands, and ensuring timely decisions
on lease applications for gas production on federal lands, thus permitting
requests for natural gas pipelines and production on federal lands.

In response to the report, House Speaker Hastert issued a statement
calling on the task force members and chairmen to "continue working
together to find environmentally responsible ways to increase domestic
supplies of natural gas and promote fuel diversity." One of the
task force chairs House Energy and Commerce Committee Chairman and
Billy Tauzin (R-LA), told E & E Daily that this report was merely
"stage one" in a process of monitoring how natural gas supply,
production and demand relate to the use of other fuels that will continue
through the next year. (9/30/03)

Secretary of Energy Spencer Abraham was on hand at the 112th meeting
of the National Petroleum Council in Washington, DC on September 25th.
There, the Council presented, approved and released their report,
"Balancing Natural Gas Policy -- Fueling the Demands of a Growing
Economy." Penned by industry leaders and members of the Bush
administration, the report asserts that a "fundamental shift"
in the nation's gas supply-and-demand balance has led to price volatility
and the doubling of natural gas prices in the past two years. The
report recommends increased imports of liquefied natural gas, construction
of an Alaskan natural gas pipeline and allowing drilling in currently
protected coastal areas and federal lands, particularly in the Rocky
Mountains. Further, it recommends lifting moratoria and allowing gas
production off the Atlantic and Pacific coasts and in the Gulf of
Mexico near the Florida panhandle. Conservation and greater energy
efficiency were touted as possible near-term fixes to prevent prices
from skyrocketing. A complete draft of the Summary of Findings and
Recommendations is available at http://www.npc.org.
(9/25/2003)

In response to the current natural gas issues, House Speaker Dennis
Hastert (R-IL) created the Task Force for Affordable Natural Gas,
which is composed of 18 Republicans from the Energy and Commerce Committee
and Resources Committee. The intended purpose of the Task Force is
to report to the Speaker on the causes of the gas supply shortage
and possible short-term solutions. On July 21, 2003, the Task Force
held it first public meeting. Task Force Co-Chair Billy Tauzin (R-LA)
said the Task Force will not dictate solutions, define balances, or
make policy. Their only concern is to recommend possible solutions.
He asked the members to assign one member of their staff to work with
the committee staff on the problem. By August 1st, Tauzin said, the
staffs should have defined background information, the current state
of the gas market, gas trends, and policy. Over the August recess,
the Task Force will hold meetings to discuss the issues. By mid-September,
the Task Force should finalize their recommendations, which are due
to the Speaker by September 30. Tauzin said he did not agree with
analysts, such as Alan Greenspan, who say there are no short-term
solutions to the natural gas shortage. Co-Chair Richard Pombo (R-CA)
said that we cannot afford to say there are no short-term solutions.
(7/28/03)

On July 10, 2003, the Senate Committee on Energy and Natural Resources
held a hearing to discuss natural gas supply and demand and its effect
on the economy. Federal Reserve Chairman Alan Greenspan testified
that the nation's has yet to be significantly affected by a current
spike in natural gas price increases and that this effect will be
difficult to anticipate. Greenspan went on to advocate a consistent
national energy policy, maintaining that the US cannot expect industry
to use natural gas without increasing the country's liquefied natural
gas (LNG) import capabilities. Greenspan likened LNG facilities to
a safety valve, allowing the US to increase imports to offset market
fluctuations. Several committee members were were concerned about
the safety of LNG facilities although panelist, President and CEO
of Tractebel LNG North America Richard Grant contended that LNG transportation
and storage is as safe, if not safer, than most other fuels.

The witnesses also condoned use of other energy sources to combat
the current shortage. These included: clean coal technology, nuclear
power, coal bed methane, tight sand gas, additional gas pipelines,
and conservation and efficiency. Assistant Secretary for Energy Efficiency
and Renewable Energy at the Department of Energy (DOE) David Garman
pushed for energy conservation, listing a number of DOE programs with
this focus. On the pipeline issue, Greenspan did not deem government
subsidies necessary, maintaining that profit sufficiently motivate
construction of a pipeline from Alaska to the continental US. (7/10/03)

The National Research Council (NRC)
Board of Earth Sciences and Resources recently released a summary
of a workshop
entitled "U.S. Natural Gas Demand, Supply, and Technology: Looking
Toward the Future." The event was held on April 22-23, 2003 in
response to a joint request by the Department of Energy (DOE),
Minerals Management Service (MMS),
and the US Geological Service (USGS)
to analyze government projections of natural gas supply and demand
issues over the next 10-20 years. The agencies charged the board with
identifying remaining natural gas reserves and with suggesting methods
of increasing these reserves, resources and production. Although speakers
focused on factors affecting supply and demand, they also addressed
tax incentives, royalties and a need for federal-private research
and technology models.

Amongst the factors influencing demand for natural gas, those that
received most mention included economic growth, technological progress,
resource bases, and carbon constraints. The workshop also revealed
that proven reserves and unconventional gas (tight sands and carbonates,
fractured shale, and coalbed gas) account for nearly 50% of technically
recoverable resources in the US. Presenters also noted that while
American demand will continue to grow, Canada, a major supplier of
natural gas, will not significantly increase its export capacity.
To meet this demand, according to workshop discussions, an educated
and trained workforce, access to off-limits lands, increased storage
capacity, a global transportation infrastructure, efficient and competitive
fiscal and regulatory regimes, and rapid technology improvements will
be necessary. (10/16/03)

Reps. Mark Udall (D-CO) and Tom Udall (D-NM) introduced H.R.
3698, the Western Waters and Surface Owners Protection Act, on
December 15th. This legislation is the product of unsuccessful efforts
to amend the embattled energy bill during its early days of being
debated in the House Resources Committee. The bill would amend the
Mineral Leasing Act of 1920 to require those seeking to extract mineral
resources from federal lands to state on applications how they will
protect water quality and quantity. The bill also would require lessees
to replace water contaminated by coalbed methane development with
fresh water that would be injected into depleted aquifers.

The measure comes as the omnibus energy conference report passed
by the House sits in legislative limbo. On November 25th, the Senate
voted 57-40 against ending debate and holding a yes-or-no vote on
the conference report. According to E&E Daily, top GOP lawmakers
are fervently seeking the 60 votes needed to get the measure to a
final vote even though lawmakers are home in their districts enjoying
the holidays with family and friends. The Senate is likely to take
up the issue again on January 20th when Congress returns to Washington.

If the energy bill is passed, it will likely increase development
of federally owned oil and gas resources through a combination of
subsidies, tax incentives and exemptions from public review requirements,
spurring the need for the stronger water protections, Mark Udall said
while introducing the bill.

According to Greenwire, other provisions of the bill would:

Require oil and gas lessees to negotiate surface-use agreements
with private landowners whose property sits over federal minerals.
In cases where an agreement cannot be reached, the legislation would
provide for an alternative dispute mechanism to ensure good-faith
negotiations.

Require that landowners be notified of leasing decisions affecting
federal oil and gas under their property.

Require full reclamation of all lands disturbed by oil and gas
development, as well as bonds to adequately cover the costs associated
with reclaiming all lands in case of forfeiture.

Establish a cleanup program for abandoned oil and gas wells on
federal lands and private lands that overlie federal deposits. (12/22/03)

The Minerals and Management Service (MMS) proposed new incentives
to boost natural gas production in the Gulf of Mexico. Published in
the January 26th edition of the Federal Register, the incentives are
designed to encourage the natural gas industry to explore deep gas
deposits and offer a variety of royalty suspensions on wells drilled
deeper than 15,000 feet. The incentives will only be offered to areas
of existing production on wells that have started since March 26,
2003. In addition, production of natural gas must begin within the
next five years.

Independent Petroleum Association of America (IPAA) spokesman Jeff
Eshelman told Greenwire, "Deep natural gas wells are often very
costly to develop, and the current royalty rate has often made the
economics of developing such wells unattractive to companies and their
investors." Industry groups said that the relatively small field
of natural gas in the Gulf of Mexico will only go so far to supply
the nation's estimated consumption of 22 trillion cubic feet annually
and continue to urge Congress to pass the stalled energy bill. Passing
the bill would allow similar incentives in coastal Alaska and in the
Mountain West states. (1/26/04)

Increased demand in natural gas is leading Texas companies to increase
drilling. Over 680 new wells were drilled in February. A new proposal
for a $50 million pipeline at Texas' Barnett Shale natural gas field
could be finished by early 2005 and would allow several companies
to benefit from the 30 trillion cubic feet of reserves. Gas prices
continue to rise and additional gas sources are constantly being sought
out. (4/6/04)

In early April, Alaska Governor Frank Murkowski (R) signed a new
law that appropriates $1.65 million to help bring North Slope natural
gas to world markets. The legislation includes $650,000 for development
of a project to export super-chilled liquefied natural gas. State
officials are having trouble with bids for the building of the pipeline.
One of the main companies withdrew its bid and another has stepped
in and proposed to build the 745-mile pipeline with help from the
U.S. and Canadian governments. State officials are still hoping to
solicit more bids. The Alaska Gasline Port Authority has won a commitment
from Calpine Corporation of California to negotiate a purchase price,
including a tariff, and ship the gas through the proposed pipeline.

Under the Stranded Gas Act, a 1998 state law, Alaska my offer bonds
or other incentives to private companies to help liberate some of
the North Slope's estimated 35 trillion cubic feet of natural gas
to markets in the lower 48 states. Tax provisions in the national
energy bill in the Senate would provide billions in federal guarantees
for construction of the pipeline. (4/15/04)

Environment and Energy Daily has reported that natural gas
prices have risen 80 percent in the last four years and are now up
to $6 per thousand cubic feet, causing the loss of more than 800,000
jobs in the chemical industry alone. Paul Cicio of the Industrial
Energy Consumers of America said that the bill's provisions are "in
everyone's interest" and would help solve the natural gas crisis.
The measure is being proposed as a substitute for some of the provisions
of the comprehensive energy bill currently stalled in the Senate and
as a complement to the energy bill (H.R.
6) that has been passed in the House.

Opposition to the bill largely comes from citizens who reside near
the sites of proposed plants in California, Alabama, Massachusetts,
and in coastal areas likely to house natural gas import facilities.
They contend that safety and terrorism risks associated with the new
plants pose a threat to their communities. The bill has been referred
to the House Energy and Commerce Committee for their consideration.
(5/26/04)

The House
Subcommittee on Energy Policy, Natural Resources, and Regulatory Affairs
met June 23rd to discuss the federal and state roles in siting
liquefied natural gas (LNG) terminals at both onshore and deepwater
ports. Chairman
Doug Ose (CA) stressed the importance of LNG, explaining that
increasing energy demands require the U.S. to import more LNG and
consequently build more ports with the ability to accept these imports.
The responsibility of licensing and securing these ports, however,
has not been clear and the Committee called for federal standards
that would specifically outline the LNG terminal permitting and siting
process. As decided by the Maritime
Transportation Security Act of 2002, the Federal Energy Regulatory
Commission (FERC) has jurisdiction over the siting and construction
of onshore terminals while the Department of Transportation (DOT),
including the Coast Guard, is in charge of offshore terminal licensing
and security.

Currently, five new terminals have been approved by federal regulators,
but all with different criteria, raising questions of how secure they
are from terrorist attacks and what danger they pose to nearby residents.
Representative Edward Markey (D-MA) stressed the importance of building
the terminals in remote locations during his testimony. He said this
would be in compliance with a law he authored in 1979 that has largely
been ignored by the DOT. He also called for a more thorough investigation
of the safety of LNG tankers despite their good record over the last
40 years. Several other witnesses agreed with Markey, emphasizing
the need for comprehensive federal guidelines before proceeding with
the authorization of 35
pending LNG terminal applications. Eight deepwater port applications
are currently being processed, but none are in operation anywhere
in the world, making deepwater ports uncharted territory. Rear
Admiral Thomas Gilmour from the U.S. Coast Guard assured the Committee
they are modeling the offshore siting standards after the onshore
terminals and are working to bring their regulatory standards in line
with those of FERC.

Representative John Tierney (D-MA) stated his concern that the standards
were relying too much on those of the industry; he believed the federal
government should set standards independently. As for state agencies,
none have a comprehensive plan addressing LNG import terminals. They
have jurisdiction only on environmental issues that fall under the
Coastal Zone Management Act and terminal siting must comply with their
management plans. Gilmour assured the Committee they have been working
with both federal and state agencies to ensure quick processing of
permits and compliance with all necessary regulations. (6/25/04)

Background

An altered energy landscape, including "new concerns over national
security, a changed near-term outlook for the economy, turbulence
in energy markets based on perceived risk, price volatility, fuel-switching
capabilities, and the availability of other fuels" prompted Secretary
of Energy Spencer Abraham to request an assessment of the state of
natural gas markets and consumption from the National Petroleum Council
(NPC). In addition to these reasons,
Abraham maintained that increased American dependence on natural gas,
which accounts for almost one-quarter of national energy consumption,
warranted this investigation. Prior to Abraham's March, 2002 request,
NPC had not analyzed natural gas since 1999. The Secretary asked that
the NPC analyze new supplies, technologies and risks as well as supply
sustainability, and energy market dynamics. He also solicited advice
on enhancing energy efficiency and the natural gas supply to meet
US energy needs.

The following February witnessed a particularly cold winter, low
stock prices, instabilities in oil producing countries such as Venezuela
and later Iraq, and a flattening out the global oil supply. This prompted
significant congressional discussion on national energy sources, including
natural gas. At a February 13th hearing,
the Senate Committee
on Energy and Natural Resources discussed the availability of federal
lands for resource exploration. When republicans complained that only
40% of federal lands (located in Alaska, mountain states, the outer
continental shelf, and most significantly on coastal areas) were available
for natural gas exploration, democrats drew attention to the meager
12% of lands completely unavailable for drilling, noting that
these lands contained little or no gas anyway. Guy Red Cavaney, President
of the American
Petroleum Institute, also commented that permitting was a greater
obstacle to gaining access to these lands than leasing.

A February 25th hearing
by the same committee that focused explicitly on natural gas confirmed
that the recent increase in natural gas prices was due to a harsh
winter, a flattening of supply, and considerable growth of power plants
using natural gas. Although short-term price volatility remained likely,
witnesses predicted that current high prices would trigger an increase
in drilling, bringing prices down. Congress could facilitate this
by granting access to federal lands and encouraging of new infrastructure
construction, witnesses maintained.

This discussion continued at a June 10th House Committee
on Energy and Commerce hearing
on Natural Gas Supply and Demand Issues. Witnesses advocated developing
a better pipeline infrastructure, reversing the drilling moratorium
on federal lands and exploring clean coal technology, liquefied natural
gas (LNG), methane hydrate, and tight-sand gas. Of note was Federal
Reserve Chairman Alan Greenspan's support of increased LNG imports.

No clear consensus has emerged on the LNG issue. During both the
June 10th hearing and a June 19th hearing
held by the House Subcommittee
on Energy & Mineral Resources, panelists debated the merits of
LNG imports. Although unique transportation requirements have rendered
LNG prohibitively expensive in the past, Greenspan noted that costs
have decreased and that a diverse set of natural gas sources would
be adventageous. Others noted that the price of LNG still remained
high, making it cost-effective only when natural gas from other sources
was particularly expensive. Some disagreed, however, contending that
LNG could be cost effective even in a market with moderately priced
natural gas from other sources.

Meanwhile repeated calls for new drilling area led to a debate on
drilling in the Artic National Wildlife Refuge (ANWR), created in
1980 in the Alaska
National Interest Lands Conservation Act. Although drilling has
never been allowed in the 19 million acre refuge, section 1002 of
the Act leaves open the possibility of drilling in 1.5 million acres
of the northern coastal plain (commonly referred to as the 1002 area)
between the Brooks Range and the Beaufort Sea. The ongoing discussion
conformed pretty closely to party lines, with republicans generally
supporting drilling and democrats opposing it. More on ANWAR is available
at http://www.agiweb.org/gap/legis108/anwr.html.

Sources: E&E News, Greenwire, hearing testimony, The Kansas
City Star, The Los Angeles Times, The National Petroleum Council website,
The New York Times, Thomas website, and The Washington Post.